According to a recent note titled: Rise of the machines: electronic platform distribution, the firm concludes that the current status quo whereby asset managers relied on past or existing market position and a highly-incentivised, commissioned advisers, will increasingly be “aggressively challenged”.
“Asset managers cannot merely take a ‘set it and forget it’ approach to distribution through the platform channel… instead, asset managers must aggressively support their product lines through almost any means short of commission-based compensation models in cases where regulations ban inducements,” the consultancy said.
This seismic shift in how asset managers see their distribution strategy is predicated on six megatrends that will continue to drive the rise of electronic platform distribution.
Trend’s a friend
These trends are: capital markets are moving rapidly away from face-to-face intermediation and fully embracing automated trading systems; Customers, particularly millenials, increasingly prefer on-demand customized information delivered via the web; RDR and MIFiD II will restructure the compensation model and squeeze out most of the opaque pricing that underpinned the old distribution system; Investor dissatisfaction following the events of the global financial crisis; increasing investor sophistication and transparency; and the exponential growth in technology infrastructure and computational power.
As a result of these trends EY believes, asset managers need to significantly rethink the way in which they look at and use platforms.
In particular, the changes seen across the globe in terms of regulation, mean that platforms will need the ability to “interface according to geographic and demographic market segments, as well as the ability to customize the individual investor experience.” While on the asset management side, this will likely mean that for most asset managers, being in all markets will not be the path to follow.
“A clearly articulated market and customer segment strategy is a must as one size cannot fit all,” it said, adding that as a result asset managers will be forced to review their products and relationships distributed via the platform channel.
“More concentrated support for fewer products will lead to better preservation of margins, enhanced competitiveness and greater aggregate distribution success. Fewer but deeper relationships, from both the manufacturer and the distributors’ perspective, will be the focus,” it said.
The other area where asset managers are going to be forced to change as a result of the rise of platform distribution will be on price, where it is inevitable that margins will be squeezed.
While EY agrees that some firms – particularly the largest global managers that can build economies of scale — “can attempt to enhance or at least protect some degree of pricing power, particularly through investment in customer experience and building brand identity”, in the long run most firms will be forced to adapt to a new world “of lower margins and increasing market demands for more screen-based services, more choice, more transparency and more competitive pricing.”